FR 2021-03456

The Federal Deposit Insurance Corporation (FDIC) has issued a new rule to change how large and highly complex banks are assessed for deposit insurance. This rule aims to address specific technical complications related to the Current Expected Credit Losses (CECL) methodology, ensuring that banks are assessed accurately for their risk to the deposit insurance fund. These adjustments are primarily technical in nature and are designed so that large institutions do not benefit from or are negatively impacted by an accounting method that could lead to unfair assessments. The rule will take effect on April 1, 2021.

Significant Issues and Concerns

One of the primary concerns is the complexity and technical nature of the rule, which relies heavily on regulatory language and references that may not be accessible to a general audience without specialized knowledge or background. The rule contains many technical references, such as the CECL methodology and specific financial calculations, making it potentially challenging for non-experts to fully understand its implications.

Moreover, there's a concern that the rule's explanation of financial impacts, such as the estimated $55 million in foregone annual assessment revenue, lacks detail. This could create questions about the financial implications and expected changes in costs for the government and banks.

The issue of administrative burden is another concern, especially for large and complex banks that may need to adjust their internal systems to comply. While the FDIC anticipates that these adjustments will be minimal, this assumption may not fully account for the variations in readiness and resources among different institutions.

Impact on the Public and Stakeholders

Broadly speaking, the public might not be directly affected by this technical adjustment, but it's important for financial stability that banks are assessed correctly, which in theory, could contribute to the overall health and safety of the financial system. Such measures help maintain confidence in the banking system, which ultimately benefits consumers and businesses that rely on stable financial institutions for their banking and credit needs.

For stakeholders, particularly the large and highly complex banks, the rule is expected to have varying impacts. Some banks might find themselves paying different rates for their deposit insurance than they currently do—potentially more or less, depending on their current accounting practices related to CECL. The banks not yet using CECL should be slightly reassured that the rule will not impact them immediately. However, there could be a longer-term effect as more banks transition to CECL and potentially choose transition provisions.

The rule aims to correct perceived inequities in how deposit insurance assessments are calculated, potentially creating a fairer competitive landscape among banks of differing sizes. Small banks, identified as having less than $600 million in assets, will not be directly affected by this rule, which focuses on those with $10 billion or more in assets.

In summary, while the rule focuses on technical fixes primarily impacting large banks, its implementation reflects ongoing efforts to ensure a balanced and equitable financial regulatory environment. The public is indirectly served by these measures, as they contribute to the stability and reliability of the banking sector. Nevertheless, it remains essential for the FDIC to communicate clearly and provide support to ensure seamless adaptation by affected banks, safeguarding both institutional and public interests.

The document from the Federal Deposit Insurance Corporation (FDIC) addresses amendments to the risk-based deposit insurance assessment system, specifically focusing on how banks' financial measures are calculated. This is in relation to the implementation of the Current Expected Credit Losses (CECL) methodology. The document meticulously outlines the adjustments needed to remove double counting in banks' financial evaluations when determining their insurance assessment rates.

Financial References and Allocations

The document provides several financial references that are central to understanding the adjustments being made:

1. The document discusses a hypothetical case of a bank's adjustments post-CECL adoption. It mentions that prior to adopting CECL, a bank held $1 million in Allowance for Loan and Lease Losses (ALLL) along with $10 million in Tier 1 capital. Post-adoption, the bank adjusts to $1.2 million in allowances, resulting in a temporary reduction of Tier 1 capital to $9.8 million, due to a $200,000 reduction tied to CECL impact on retained earnings.

2. The document identifies a projected outcome where not correcting this double counting in assessments could lead to approximately $55 million in annual foregone assessment revenue. This equates to about 0.047 percent of the Deposit Insurance Fund (DIF) balance at a specific date.

3. The text outlines the financial characteristics of the institutions involved. For instance, a large bank is defined as having $10 billion or more in total assets, while a small banking organization is one with $600 million or fewer in assets.

4. Larger financial entities with significant asset holdings, like highly complex banks, are described. Such institutions typically manage $50 billion or more in assets.

Impact and Issues

These financial references play a crucial role in assessing how banks calculate their risks and, subsequently, their contributions to the deposit insurance fund. The document highlights potential issues and impacts:

• Double Counting and Assessment Inaccuracy: The FDIC addresses double counting of CECL transitional amounts, which affects assessment rates. Without adjustments, banks might not accurately reflect their actual risk, leading to inequitable assessment contributions.

• Foregone Revenue Calculation Complexity: The estimation of $55 million in foregone revenue raises questions about the financial implications of assessment inaccuracy. This suggests that banks might either contribute too little or too much under the current system without implemented changes.

• Affect on Different Bank Sizes: The text notes that small banks and those not using CECL transition provisions are largely unaffected by these assessments, being below the $10 billion threshold. However, large and complex banks might face additional regulatory burdens associated with recalibrating financial measures.

• Administrative Burdens: While mentioned as de minimis, the administrative cost implications for banks adopting the changes are acknowledged but not deeply explored, adding potential concern for large institutions managing the transition.

In summary, the financial references in the document shed light on the intricacies of implementing new banking regulations, especially those targeting how risks and capital are calculated and what implications these have on institutional assessments. The core goal rests on achieving equitable banking assessments while acknowledging challenges such as understanding and calculating financial transitions and the overarching financial environment.